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Will a Linkage Fee Now Depress Development Later?

The looming citywide linkage fee—a proposed square-footage tax on all new development, intended to pay for “workforce” housing—isn’t discouraging new development. In fact, according to the latest report from apartment market analysts Dupre + Scott, developers will open 12,000 new apartment units this year, followed by 11,000 in 2016 and “a total of just over 48,000 units developers plan to open between 2015 and 2019.”

The real issue, Dupre + Scott suggest, may not be excessive demand for housing (which drives up rents and, according to impact fee proponents, exacerbates Seattle’s affordable-housing crunch), but overdevelopment.

As Dupre + Scott put it:

Can demand keep up with all this new supply? The honest answer is, who knows. In the past five years new demand averaged just over 6,000 units a year. That won’t work. But keep in mind that developers didn’t build a lot in the past five years, averaging only 5,400 units a year. It’s kind of hard to create demand for something that isn’t there. Looking back a little farther, demand averaged just over 11,000 units a year between 1986 and 1990.

Although the vacancy rate is still declining, Dupre + Scott believe that trend will reverse as new units come on the market. Higher supply creates downward pressure on rents, which indeed are already rising more slowly than they have in the past. “Developers opened 8,919 units in the past 12 months and the market added 8,632 new renter households in the same period. Is that perfect timing or what?”

What does all this mean for the linkage fee? Hard to say. The new numbers could be used to make the case for or against the fees. Proponents say impact fees will make developers pay for the impact (rising rents) of their pricey new developments. Opponents say that taxing new buildings discourages development, and will eliminate the safety valve that keeps rents relatively low by creating places for higher-income people to live.

For proponents, the stats could be used to demonstrate that Seattle has a robust development market that can well afford to pay the new fee to help people who can’t afford to live in their fancy new towers. The existence of new developments, in this view, proves that new developments are happening no matter what and the city should take advantage by charging them to pay for badly needed affordable housing. (Just yesterday, Mayor Ed Murray proposed building 20,000 new affordable units in the next 10 years, a number housing advocates say is still grossly inadequate.)

For opponents, that same robust housing market, combined with reduced upward pressure on rents, shows that the city has struck the right balance between supply and demand that encourages new development but also keeps housing prices lower than they would be without all the new supply. In this view, taxing new development across the city will disturb that balance, discouraging development and leading to higher rents citywide.

Whichever camp you fall into, the ultimate takeaway from the Dupre + Scott report is that eventually, the development boom will end, and that is not something the debate over impact fees takes into account. Whatever policies we put in place now are policies we’ll have to live with when the economy inevitably slumps. Do we want new development to be saddled with impact fees, which make development more expensive, during tough economic times? Or do we want to let developers “get away with” a fee-free building frenzy now, with the knowledge that they’ll be more likely to continue building later, when the market is no longer red-hot, if they don’t have to pay an extra tax to do so?